Revealed: The true cost of hiring an employee

It has historically been very difficult to calculate the real cost of an employee. The salary is, of course, easy; it is all the non-wage costs relative to salaries that can be tough to quantify. The costs vary enormously depending on the size of the organisation.

On average, a business with one employee and one owner faces an average employment cost of £35,500 per worker, according to new research published by the Federation of Small Businesses (FSB) and the Centre for Economics and Business Research (Cebr).

The first employee is them most expensive one, though, as the business faces higher non-wage costs relative to salaries, compared with larger firms.

Approximately 20 per cent of total employment costs come from national insurance contributions, as well as income tax on the owner’s salary. In addition, the cost of the business owner’s time in carrying out regular administrative tasks is estimated to be equivalent to 2.3 per cent of total costs, paid out of the owner’s salary.

In contrast, a typical business in the 20-49 employee category faces an average cost of £25,100 per worker. 

As a business increases its headcount, a greater proportion of total employment costs are devoted towards the wages of employees, instead of overheads, meaning that firms may become more efficient with size.

Average cost

The research estimates that a typical small business pays out on average £189,600 towards staff costs, of which 15.1 per cent are non-wage costs. These include employer’s national insurance contributions, payroll processing and hiring a replacement staff member in the event of a worker being off sick. 

Total employment costs are estimated to be highest in the health and education services sector (£280,900) and lowest in the accommodation and food services sector (£117,400).

“This research follows a significant rise of self-employment in an increasingly entrepreneurial Britain,” says Charles Davis, director at the Cebr.

“But one of the key findings here is that hiring one’s first employee costs a lot more than just paying their wages. This raises the question: could the government do more to make it easier for the plethora of one-man bands and micro-businesses to take on more employees?”

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